Dienstag, 10. März 2009

Germany's fiscal stimulus

Big headline in today's Sueddeutsche Zeitung: Obama and Summers are asking for much bigger European stimulus package.

Apparently, Obama has even said that the current economic downturn is to a large extent due to Europe's economic weakness, which according to him has negative effects on the US economy.

Yeah, right.

Germany's fiscal position will go from a balanced budget in 2008 to a deficit of roughly 5 % in 2009, and to an even bigger deficit in 2010. And that doesn't even include the various bailout packages, loan guarantees and export guarantees.

If that isn't expansionary fiscal policy, then what is?

(I know, official projections foresee a deficit of 3 % for 2009, and 4 % for 2010. But they are far too optimistic regarding unemployment and corporate tax receipts)

The world has to face the fact that the current downturn goes hand in hand with a huge sectoral shift in demand. No amount of stimulus will change that. Spending money on useless things makes no sense, unless you want to argue that people are genuinely happier doing useless work (wasting scarce resources in the process) than being idle. The only thing that stimuli can and should do is soften the impact of the downturn, and keep the economy from falling into a downward spiral.

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